The NYT had a piece on how Mexico's economy remains weak and the government is again plagued by corruption. At one point it comments that:

"Growth has been slower under Mr. Peña Nieto’s presidency than the annual 2.3 percent average in the two decades before he took office."

It is worth noting that a 2.3 percent growth rate is extremely weak for a developing country. It means that Mexico was actually falling further behind the United States even before the slowdown under President Nieto. Furthermore, as the article points out, it appears that workers are seeing little or no benefit from even this limited growth, as wages remain quite low.

Last year marked the twentieth anniversary of the implementation of NAFTA. At the time there was much celebration in the media and among economists anxious to pronounce the deal a huge success. While it is always possible that Mexico's economy would have performed even worse without NAFTA, its actual record is not much to boast about.

It is worth singling out the Washington Post in this context which periodically celebrates the rise of the middle class in Mexico in the post-NAFTA era. The Post famously invented numbers to make its pro-NAFTA case, telling readers back in 2007 that Mexico's GDP had quadrupled since 1987. The actual increase was 83 percent. It has never bothered to correct this one.

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  • The dividends went to our corporate overlords. They want to repeal both the New Deal and the labor movement, and this was a big step along the way. As was Our President Hope and Change getting Fast Track for G.W. Bush's TPP (aka NAFTA-on-steroids). ~
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  • Guest - Dean Baker

    Yes Urban Legend, 83 percent growth in two decades is something we can smirk out. Economies grow, unless they are hit by war, natural disasters, or really awful economic policy. The issue is the rate of growth and 83 percent over two decades for a developing country (3.1 percent annually) is pretty ...
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  • Guest - urban legend

    Is 83% something we can sneeze out? It's not a very compelling point to say "Mexico's GDP only doubled (nearly) under NAFTA, not quadrupled as The Washington Post claims." The NAFTA advocates can smirk while saying, "Whoops, our bad."
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It is amazing how economic reporters and many economists continue to be obsessed with the topic of deflation. They seem to hold the view that when inflation crosses zero and turns negative, then something happens. This is in spite of the fact that there is zero (as in none) reason to believe this would be the case in theory and zero evidence that it is the case in reality.

Yet, we once again see the NYT tell readers in a piece on the current agenda of European Central Bank (ECB) President Mario Draghi:

"Inflation, at 0.2 percent in August, was unchanged from June and July. The rate is still well short of the European Central Bank’s official target of just below 2 percent.

"Some economists remain concerned that the eurozone could yet slip into deflation, which has already infected some eurozone countries like Greece."

Suppose that inflation went from 0.2 percent to -0.2 percent so that the euro zone was experiencing deflation. Why would this be any worse than a decline from 0.6 percent to 0.2 percent? The problem is that the inflation rate is too low. Any drop in the inflation rate makes the situation worse. It has the effect of raising real interest rates and raising the real value of debt, but crossing zero doesn't matter, the drop in the inflation rate is all that matters.

There is a story that can be told of spiraling deflation, where deflation feeds on itself, except we never see this. Even Japan never experienced spiraling deflation. We did have something like spiraling deflation at the start of the Great Depression, but there is little reason to believe any countries face this threat now and certainly not from having their inflation rate slip a few tenths of a percentage point below zero. (As I've pointed out in times past, our measurements are not even accurate enough to ensure that a reported 0.2 percent inflation rate is in fact above zero.)

Anyhow the deflation obsession continues. I suppose like the belief in a flat earth, it is impervious to evidence.

It is probably worth mentioning that the deflation in Greece is not seen by the ECB as a problem. It is by design. Greece needs to regain competitiveness with Germany and other northern euro zone countries. This could be done by these countries having higher inflation rates, for example as a result of larger budget deficits in these countries. The euro zone has quite explicitly chosen to not go this route. As a result, the only route for Greece to regain competitiveness is through deflation.

Recent comments

  • Guest - skeptonomist

    The major monetary problem in the Depression (1929-1933) was probably banks collapsing, not the feedback from deflation itself. Money was vanishing, not being hoarded. People were afraid their money would disappear, so pulled it out of banks and made the general fear come true. This is not hoarding...
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  • Guest - Jesse

    As you know, the real concern with deflation is that it can take hold in peoples' buying patterns, and begin to dampen consumption as the hoarding of money and the deferral of purchases in the hopes of lower prices take hold. It is a perceptual argument. This is the difference between a fluctuatio...
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  • Guest - Lord

    It is probably because that is about the only time one can expect central banks to respond.
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Washington Post editorial writer Stephen Stromberg told Post readers that President Obama is not a climate hypocrite for talking about climate change even as he opens areas in the Arctic for drilling. Stromberg was responding to environmental groups who argued that if we are to prevent dangeorous levels of global warming, we will have to leave large amounts of the world's oil in the ground. They argue opening the Arctic for drilling is a serious step in the wrong direction.

Stromberg's response is that the environmentalists are engaged in confused thinking. He cites a column by Michael Levi at the Council of Foreign Relations:

"'[M]ore oil production in one place generally means less oil production elsewhere — that’s how markets and prices work — which substantially blunts the effect' that Arctic drilling would have on global greenhouse emissions."

In other words, Stromberg is arguing that if we drill more oil out of the Arctic, it will be offset by less oil coming from other places. This assertion is largely true, but it leaves out an important part of the picture.

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  • Guest - Last Mover

    Stromberg says in Keystone Pipeline fashion supply will emerge anyway, asserting the correct way to offset warming is with taxes on emissions or mandates on less use. Producers are not indifferent to taxes or mandates. Why would they be indifferent to higher costs outside the Artic?
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  • Guest - Dennis

    The fossil fuel industry would be foregoing vast piles of money by not drilling? Do they have a divine right to make this money. No, they have been granted the right to drill by governments. There would be no money to be made otherwise. Completely separate from the climate change slow-motion crisis,...
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It’s always dangerous when followers of an insular cult gain positions of power. Unfortunately, that appears to be the case with the Washington Post editorial board and the Federal Reserve Board Cultists.

The Federal Reserve Board Cultists adhere to a bizarre belief that the 19 members (12 voting) of the Federal Reserve Board’s Open Market Committee (FOMC) live in a rarified space where the narrow economic concerns of specific interest groups don’t impinge on their thinking. According to the cultists, when the Fed sits down to decide on its interest rate policy they are acting solely for the good of the country.

Those of us who live in the reality-based community know that the Fed is hugely responsive to the interests of the financial sector. There are many reasons for this. First, the twelve Fed district banks are largely controlled by the banks within the district, which directly appoint one third of the bank’s directors. The presidents of these banks occupy 12 of the 19 seats (5 of the voting seats) on the FOMC.

The seven governors of the Fed are appointed by the president and approved by Congress, but even this group often has extensive ties to the financial industry. For example, Stanley Fischer, the current vice-chair, was formerly a vice-chair of Citigroup.

The third main reason why the Fed tends to be overly concerned with the interests of the financial sector is that its professional staffers are often looking to get jobs in the sector. While jobs at the Fed are well-paying, staffers can often earn salaries that are two or three times higher if they take their expertise to a bank or other financial firm. As economic theory predicts, this incentive structure pushes them toward viewpoints that often coincide with those of the industry.

The net effect of these biases is that the Fed tends to be far more concerned about the inflation part of its mandate rather than the high employment part, even though under the law the two goals are symmetric. If the Fed tightens too much and prevents hundreds of thousands or even millions of workers from getting jobs, most of the top staff would not be terribly troubled and it is unlikely anyone would suffer in their careers. On the other hand, if they allowed the inflation rate to rise to 3.0 percent, it is likely that many top officials at the Fed would be very troubled.

There is very little basis in economic research for maintaining that a stable 3.0 inflation rate is more costly to the country than having 1 million people being needlessly unemployed, but the view coming from the Fed is that the former is much worse than the latter. The Fed cultists at the Washington Post and elsewhere want us to just accept that this is the way the world works. It’s not surprising that some folks don’t quite see it that way. 

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  • Guest - rich

    Ties are deep and long, maybe? ghosts in the halls? Meyer-Graham period The newspaper was purchased in a bankruptcy auction in 1933 by the former Chairman of the Federal Reserve's board of governors, Eugene Meyer, who restored the newspaper's health and reputation. In 1946, Meyer was succeeded as ...
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  • Standard procedure for Fred Hiatt and Jackson Diehl (editor and deputy editor of the WaPo editorial board). These are the people constantly granting oped space to war criminals like Dick Cheney and Elliott Abrams. Of course their take on domestic policy is just as evil. ~
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  • Guest - pieceofcake

    so what - as I really would love to know if economists and journalist are just pretenting not knowing what's going on? I mean - it's no secret that if the FED raises rates the speculators and gamers of teh market will make again for the exit in the Casino - and we might have another 'lost confidence...
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The sequester put in place as part of the 2011 budget agreement is continuing to bite, as most areas of discretionary spending are seeing their budget cut in real terms. One of the areas slated for the biggest proportional cuts in the Bureau of Labor Statistics (BLS). Ready to head for the barricades?

Okay, I know that the data produced by the BLS doesn’t sound especially sexy. After all, we aren’t talking about children going hungry or pregnant women being denied medical care. But on a per dollar basis, I would argue that BLS funding is among the best investments out there.

The purpose of the data collected by the BLS is to let us know how the economy is doing. Based on the data it produces we can know who is getting ahead and who is falling behind. We can know whether college degrees are really paying off, or paying off equally for everyone. We can know how long people spend being unemployed after losing a job or how much less they are likely to make when they find a new job.

Yes, we all have common sense understandings of these issues. We have friends, neighbors, and co-workers all of whom have experiences in the labor market, dealing with health care insurance, planning for retirement. These impressions are valuable, but sometimes our impressions are wrong. Our immediate circles of contacts may not be typical. The data from BLS lets us get beyond these impressions to get a fuller picture of the economy.

This matters hugely for important policy decisions. Right now there are many people who are anxious to have the Federal Reserve Board raise interest rates to slow the economy and the pace of job creation. The key factors in whether this makes sense are the pace of inflation, the pace of wage growth, and the extent of unemployment or various forms of under-employment.

We should want the best possible data on all of these items. It would be an enormous tragedy if the Fed raised rates and prevented hundreds of thousands of workers from getting jobs, and millions from getting pay increases, because it thought the inflation rate was higher than it actually is.

Recent comments

  • Guest - Marina

    Thanks for calling attention to this. I am very alarmed by it, and independently encountered it while trying to update some graphs for a basic textbook. As others have noted, the unit that compares US manufacturing wages and related data to manufacturing wages and related data in other countries has...
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  • Guest - John Wright

    Perhaps having good data about the labor market is not useful to American employers or the elite as it might cause more discontent in the American labor force. The BLS has the average growth rate for all occupations at 11% over the 2012-2022 period. Note, this is the entire incremental growth over...
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  • Guest - Last Mover

    The obvious solution is to privatize BLS like everything else in government to be more efficient and save money. The free market fascist crowd will have a party with that one, like with measures of unemployment. Take a poll among the 1% and ask them, What do you want it to be? LOL.
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Robert Samuelson has a column this morning on the impact of globalization on national economies. At one point the piece tells readers:

"Globalization has also punished the United States. From 2004 to 2006, the Federal Reserve raised short-term interest rates by 4.25 percentage points, believing that long-term rates on bonds and mortgages — which affect the economy more — would follow. They didn’t. If they had, would the 2008-2009 financial crisis have been avoided or softened? Then-Fed Chairman Ben Bernanke later argued that a 'global savings glut' of dollars — flooding into bonds — kept long-term rates down."

This comment leaves out a very important part of the story. Foreign central banks, most importantly China's, were buying up massive amounts of U.S. government bonds in this period. Their goal was to prop up the dollar against their currencies so that they could continue to run large trade surpluses and leaving the United States with large trade deficits. The trade deficit peaked at just under 6.0 percent of GDP ($1.1 trillion in today's economy) in 2005.

Since the central banks were buying up long-term bonds it is not surprising that long-term interest rates stayed low in spite of the Fed's decision to raise short-term rates. The impact of the foreign central banks policy on long-term interest rates is the same as the recent Fed policy of quantitative easing. Markets don't care if bonds are purchased by the Central Bank of China or Japan or the Fed, it has the same impact on bond prices and interest rates.

Recent comments

  • Guest - Dean Baker

    I'm hesitant to speak for Krugman, but he and I would certainly agree that if China sold off large amounts of its U.S. bonds that it would lead to a lower-valued dollar and increase in net exports for the U.S. That is good in both his and my view. I believe it would also lead to some rise in long-te...
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  • Guest - Marko

    Haha. Greenspan set out to blow a pretty housing bubble and ended up creating The Bubble That Ate Western Civilization. Then he wised up , saying : "I'm outta here. Here y'go , Ben. Good luck ! " Funny , isn't it , that the Fed requested and was granted permission to cease reporting range guideline...
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  • Guest - al

    So if this is not meant as sarcasm, you seem to be at odds with Krugman and others who are saying that China selling of US bonds is unlikely to raise interest rates. If buying, or "suck", would have the effect of keeping rates down, the "blow" or sell off going on now is going to inflate rates. Is ...
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The NYT had an interesting piece noting criticisms from the left and right directed at the Federal Reserve Board over its monetary policy decisions. It concludes with a comment from Princeton University professor and former Fed vice-chair Alan Blinder, saying that the Fed cannot do much to either reduce inequality or government indebtedness.

This is not accurate. From February of 1994 to March of 1995, the Fed made a decision to raise its short-term interest rate from 3.0 percent to 6.0 percent. This was done to slow the economy and the rate of job creation. This was due to the fact the unemployment rate was falling into or below the level that the Fed models showed were consistent with stable inflation. In these models, if the unemployment rate was allowed to fall much below 6.0 percent, the inflation rate would begin to accelerate, leading to a problem of spiraling inflation.

In the summer of 1995, after the economy had slowed, the Fed chair Alan Greenspan pushed the Fed to lower interest rates even though the unemployment was below most estimates of full employment. He insisted that the Fed allow the unemployment continue to fall over the next four years even as it crossed 5.0 percent and eventually 4.0 percent in 1999 and 2000. This period of low unemployment was the only time in the last 40 years in which workers at the middle and bottom of the wage distribution saw sustained growth in real wages.

This is how Fed policy can affect inequality. If the Fed had not been pushed by Greenspan, who is not an orthodox economist, it likely would have raised interest rates during this period and prevented the low unemployment and real wage growth of this period.

It is also worth noting that the Fed's policy was also the basis for the budget surpluses at the end of the decade. In 1996, after all the Clinton-Gingrich tax increases and spending had been passed into law, the Congressional Budget Office (CBO) projected a deficit for 2000 of close to $250 billion (2.5 percent of GDP). The fact that we had a surplus of roughly the same amount was not due to changes in budget policy, but rather the fact that we had an unemployment rate of 4.0 percent rather than the 6.0 percent projected by CBO. (The tax from capital gains created by the stock bubble also helped.)

Recent comments

  • Guest - urban legend

    "NAIRU is actually untested aside from that, but it is accepted on faith by many economists and the Fed." Some -- probably most sometimes -- go so far as to call it "the" NAIRU. I'm sure I'm not the first to call it the "NAIRU jacket" or the "NAIRU straightjacket." It's one of a number of policy c...
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  • Guest - JF

    The FED looks at the $2.7 Trillion in excess reserves held on the books of the banking system and this scares the hell out of them. Me too. But I do wish the banking system would lend out some of this at LOWER credit prices to SMEs, to finance durables purchases by the bulk of US residents at lowe...
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  • Guest - skeptonomist

    The Fed has a mandate to control inflation and because of massively flawed economic "theory" controlling inflation is tied to beating down wage increases. During the inflation of the 70's the Fed explicitly aimed at defeating unions' demands for wage increases even though wages clearly were not kee...
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The NYT had a piece on the proposals that various candidates have proposed to rein in Wall Street. The piece reports that former Secretary of State Hillary Clinton has proposed applying the normal income tax rate of 39.6 percent to capital gains on assets held less than six years rather than the 20 percent tax rate. (In both cases, capital gains for high income taxpayers are also subject to a 3.8 percent surtax connected with with Affordable Care Act.) It would have been helpful to point out that the lower capital gains tax currently only applies on assets held at least one year, so very short-term gains already do not qualify for the lower tax rate. Also, Secretary Clinton's proposal would phase down the tax rate to 36 percent for assets held between 2–3 years, 32 percent for 3–4 years, on down to 20 percent for assets held more than six years.

It also would have been worth more discussion of the proposals for financial transactions tax. According to an analysis by the Tax Policy Center of the Urban Institute and the Brookings Institution, a tax like the one proposed by Senator Bernie Sanders would reduce Wall Street's income from trading by more than $75 billion a year. This dwarfs the impact of all the other measures discussed in this article, including the Dodd-Frank financial reform act.

Note: An earlier version of this post had said that Clinton's proposal would have the 20 percent rate on assets held for more than two years. Thanks to Robert Salzberg for correcting this error.

Recent comments

  • The income tax is much too complicated already. I think it would be better to switch to a progressive consumption tax. you might be able to push top rates quite high with a progressive consumption tax (65%) and it has potential to be much simpler. Then capital gains and other income get treated the...
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  • Guest - JF

    Financial transaction tax, ok, but pls apply modest rates on stocks but higher rates for debt trading, much higher for complex financial instruments. Target a very modest amount of revenues but directly raise taxes on banks and non-banks so they pay for their privileges, pay/offset for some of the ...
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  • Guest - djb

    "Hillary Clinton has proposed applying the normal income tax rate of 39.6 percent to capital gains on assets held less than six years rather than the 20 percent tax rate. " we are not talking about a wealth tax, capital gains is income piketty wants a wealth tax so if you are saying we shouldn't ...
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Well, that may not be what they intended to point out, but it is in fact what they pointed out, according to the International Business Times. According to the paper:

"Critics point to the results in France and Italy, which have their own financial tax regimes. In Italy, average daily trading in Italian stocks dropped 29.7 percent in January and February 2014, compared to the average for the same period in 2013, Credit Suisse trading strategy analysts said last year."

The tax rate on trades on exchanges was 0.1 percent on the transaction. If transactions costs averaged 0.3 percent before the tax, then this increased the cost per transaction by 33 percent to 0.4 percent. While the cost per trade will have risen by one third, the critics tell us that trading volume fell by 29.7 percent.

This means that Italian investors are actually spending 6.5 percent less on stock trades now than they did before the tax was put in place (0.703*1.33= 0.935). Since traders don't on average make money on trading (some win and others lose), investors are actually saving money as a result of the tax. The full cost of the tax is therefore coming out of the pockets of the financial industry in the form of reduced trading volume. This would explain why they are critics of the tax.

 

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  • Guest - Dave

    Your post was confusing, unfortunately. I didn't get it.
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  • Guest - Mike

    @Jim Hanley, If you are charging advisory service fees of 1% the client would not notice a 10 basis point increase in fee to cover the transaction tax. Of course, I assume you are advising clients on how to "invest" rather than trying to make gains from "trading". For you the trade is a way to bu...
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  • Guest - Jim hannley

    It is a discouraging assertion to read that with a 1% fee, most brokers will lose (client) money over time. I like to believe that I add net value to my client accounts.
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Robert Shiller rightly deserves his Nobel Prize as perhaps the world's leading expert on asset bubbles. (I beat him by a year on the housing bubble in the United States.) But I think he gets the story badly wrong in making the case that there is currently a serious bubble in the U.S. stock market.

Shiller's rationale is that the price-to-earnings ratio is well above its historic average. Furthermore, he points to the large stock plunges the last three times the price to earnings ratio approached current levels in 1929, 2000, and 2007. 

There are two reasons I find the case less than compelling. First, it seems very plausible that people feel more comfortable investing in the stock market today than was the case thirty or forty years ago. This can be explained by the existence of index funds and the growth of defined contribution pensions. As a simple factual matter, a much larger percent of the population has stock holding today than was the case forty years ago, even if the distribution of holdings is still quite skewed.

The implication is that people if people view the market as less risky now than in the past, stock would command a lower risk premium than it had historically. This would justify a higher price-to-earnings ratio. This could mean that something like the ratio of 27 that Shiller calculates, compared to a long-term average of 17, could be reasonable. The ratio of 44 he calculated for 2000 clearly was not. (Note that the 2000 ratio is more than 60 percent higher than the current ratio.)

Btw, the tumble from 2007 peak was associated with a small detail: the collapse of the housing bubble and the ensuing financial crisis. I had warned of the market peak back then not because I thought stock prices were inherently too high, but that no one on Wall Street anticipated the devastation that would follow the collapse of the housing bubble.

The other reason why the current PEs in the stock market might be justified is that interest rates are well below their historic averages. With the nominal rate on 10-year Treasury bonds at just over 2.0 percent and the inflation rate around 1.6 percent, the real interest rate is roughly 0.5 percent. This compares to a long-period average in the range of 2.5-3.0 percent.

With the alternatives to holding stock offering returns that are far lower than they have in the past, it makes sense that people would be willing to accept a much lower return on their stock. The current PE should still allow a premium in the range of 4.0 percentage points relative to bonds, which is roughly the long period average. Of course if we had reason to expect that the real returns on bonds would rise sharply in the near future, then this argument would not carry much weight, but there does not appear to be any good story as to why real bond yields should be headed much higher in the near future. 

In short, stocks do look high in the sense that people should expect lower returns in the future than the historic yield on stock, and they certainly should not expect to see anything like the run-up from 2009-2014. However, there is no reason to expect a sharp downturn barring a major downturn in the economy for reasons not currently in sight.

Recent comments

  • Guest - e abrams

    so, no one has the slightest idea ? or, in the old satire, the stock market will probably continue on a modes upward trends, assuming current conditions persist, however, there is significant room for a downturn, which might occur in the near or mid or long term future.....
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  • Guest - Richard

    I'm inclined to agree with Dean Baker over Shiller: low inflation + low real fixed income rates is compatible with higher than average PE. I'd add what I think is Brad DeLong's observation: If you want higher interest rates, moderately higher inflation and economic stability, then the U.S. + other ...
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  • Guest - pieceofcake

    any kind of 'market' too many speculators are 'playing' with is in a bubble - and anybody who is in the game knows that right now. So 'the gamblers' wisdom goes: 20 percent of hatrd ciore gamblers in the 'Stock market' means an overvaluation of roughly the same percentage- And about 'the risk'. If y...
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The NYT had an interesting map showing the extent to which countries trade with China as a way of illustrating its importance to the world economy. The main measure of the importance of trade with China is a circle showing the sum of imports and exports.

This is not really accurate, since the impact of a slowdown in China's economy will be very different in its impact on imports and exports. If China's economy's slows sharply then the amount it imports from other countries will likely fall or at least grow considerably less rapidly than if its growth rate had been sustained.

On the other hand, there is no direct effect of slowing on China's exports to its trading partners. There may be an indirect effect insofar as China's slowing is associated with a lower value of its currency. In that case, its goods and services will become cheaper to its trading partners, which will likely lead to more rapid growth in Chinese imports by its trading partners. However this effect is likely to be considerably smaller than the impact on the exports of trading partners, which will fall due to both slower growth and changes in currency values.

It also would have been helpful if the numbers were expressed as shares of GDP. For example, Germany's exports of $94 billion annually to China are far more important to its economy than the $153 billion exported by the United States, since the U.S. economy is more than four times as large as Germany's.

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  • Guest - Ellen1910

    I, also, wondered why Hong Kong was given its own column. Presumably, as a port city Hong Kong is a transhipper. What are we expected to make of its inclusion as an importer?
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The NYT told readers:

"The Federal Reserve has said that it expects to raise interest rates sometime soon, given evidence over the last year that economic growth is picking up."

This undoubtedly had people wondering what the paper could have in mind. GDP growth has averaged less than 1.7 percent over the last three quarters. While employment growth has remained strong, the pace has slowed in recent months. Wages are barely keeping pace with inflation, with no sign of acceleration. Housing starts have picked up, but non-residential investment has been virtually flat.

In short, we are not looking at a story of the Fed raising rates in an economy that is picking up steam, rather the Fed seems to have lowered its expectations so that it is now prepared to raise rates and slow growth in an economy that is operating well below almost everyone's estimates of potential GDP. What has changed is the Fed's perceptions of an acceptable level of GDP and employment, not the economy.

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  • Guest - urban legend

    Is Janet Yellen a case of be careful who you wish for?
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  • Guest - BethinOR

    So, is the Fed considering current conditions to be some kind of completed accounting correction resulting in a new "normal"? What are the possible ramifications?
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  • Guest - Sirus

    Capital flow accelerated in July as durables show. Your point is null and void. That "1.75" is pure government mumble. They can't even figure out what inflation is and have not for years due to tech deflation. Real Rages have surged over the last year. The point above and graph is not what you think...
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Andrew Ross Sorkin seems prepared to pronounce Ken Rogoff to be prescient once again with his prediction that China would run into a debt crisis. Rogoff's past claims to prescience might be viewed as somewhat questionable. He, along with co-author Carmen Reinhardt, famously argued that countries face a severe slowdown in growth when their debt to GDP ratios exceed 90 percent. It turned out that this claim was driven by an error in an Excel spreadsheet, nonetheless it was used to justify austerity in the euro zone, the United States and elsewhere. This austerity did help to worsen the downturns caused by the collapse of asset bubbles, in effect contributing to the crisis that Sorkin credits Rogoff with predicting.

Anyhow, the jury is still out as to whether China will face a serious slump due to its market downturn, as Rogoff himself is quoted as saying in Sorkin's piece. The prediction on which Rogoff and just about everyone else in the world has been proven correct is that China's stock market bubble would burst. (It had risen by 150 percent between June of 2014 and June of 2015.) Rogoff does not seem prepared to say even now that this will lead to a more general collapse of China's economy.

Recent comments

  • Guest - JDM

    Now, mind you, this numbers problem is not even apropos to the problem, since the Rogoff 90% claim was based on shoddy fact-checking (at best). They not only did their famous spreadsheet error, they cherry-picked their data, leaving out data from New Zealand for no good reason, data which, if inclu...
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  • Guest - JDM

    BTW, reading further I get more confused. The Rogoff claim was,mAFAIK, about the ratio of gross government debt to GDP (the figures I gave in my previous comment were for total public and private debt to GDP). And from what I see, China wasn't anywhere near 90% gross government debt to GDP. So am...
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  • Guest - JDM

    The debt to GDP ratio for China is around 280%. But here's the thing if you look at the 90% mark as causation claim: China passed that mark about 15 years ago. Pretending that the 90% mark is some sort of causation doesn't make the least bit of sense if the problem happens 15 years later. And eve...
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We are seeing the usual hysteria over the sharp drop in the markets in Asia, Europe, and perhaps the U.S. (Wall Street seems to be rallying as I write.) There are a few items worth noting as we enjoy the panic.

First and most importantly, the stock market is not the economy. The stock market has fluctuations all the time that have nothing to do with the real economy. The most famous was the 1987 crash which did not correspond to any real world bad event that anyone could identify.

Even over longer periods there is no direct correlation between the stock market and GDP. In the decade of the 1970s the stock market lost more than 40 percent of its value in real terms, in the decade of the 1980s it more than doubled. GDP growth averaged 3.3 percent from 1980 to 1990 compared to 3.2 percent from 1970 to 1980.

Apart from its erratic movements, the stock market is not even in principle supposed to be a measure of economic activity. It is supposed to represent the present value of future profits. This means that if people are expecting the economy to slowdown, but also expect a big shift in income from wages to profits, then we should expect to see the market rise. So there is no sense in treating the stock market as a gauge of economic activity, it isn't.

Recent comments

  • Guest - Shiek

    As we all know the market is struggling badly and it is likely to continue for next few months, so we must avoid trading and putting risk to our funds. I have already withdrawn all my investments with my broker OctaFX instantly, it’s a lovely company which always allows me to withdraw quickly, so th...
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  • Guest - Ellis

    Yes, but you yourself admit that the U.S. economy is very weak. And because the part of the population that is employed is still extremely low, and wages and benefits are abysmal, growth in consumption is being driven not just by debt, but by subprime debt. Just look at subprime auto loans, where a ...
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  • Guest - jamzo

    not an indicator of the economy, but stock market activity is systematically and relentlessly reported in radio and television news - hard for people not to get caught up in the stock price story
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If folks can take a break from worrying about how robots are going to take all the jobs, they may want to look at a NYT piece on Japan's excess supply of housing. The basic story is that because of Japan's declining population there are now hundreds of thousands of homes across the country that are sitting empty because no one wants them.

While this is an interesting and important story, the piece also includes the standard nonsense about the demographics of an aging population devastating Japan's economy. It tells readers:

"The demographic pressure has weighed on the Japanese economy, as a smaller work force struggles to support a growing proportion of the old."

Let's see, if the smaller workforce is struggling to support a growing population of elderly they must be working weekends and overtime to make up for the shortage of workers. It seems the OECD hasn't gotten word of these struggles. According to its data, the average work year has fallen from 2,121 hours in 1980 to 1,734 hours in 2013. If Japanese workers put in as many hours today as their counterparts did three decades ago, it would give them the equivalent of 22.3 percent more workers. It's hard to see the evidence of the struggle in these numbers.

The piece also comments that Japan is:

"still building more than 800,000 new homes and condominiums a year, despite the glut of vacancies."

Maybe if the country is having such a hard time meeting the needs of its retirees, it should spent fewer resources building homes that may not be needed.

Seriously, the effects of productivity growth swamp the demographic changes that the elites keep yapping about. If Japan could lift its rate of annual productivity growth by 0.5 percentage points over the next thirty years, it would swamp the impact of its aging population. If we believe anything remotely like the robot taking our jobs story, then aging is nothing to worry about. In fact, it is a good thing since it means there are fewer people for whom we have to find work. 

Recent comments

  • Guest - John Wright

    If one believes CO2 production scales up with a larger population, then one arrow in the fighting global warming quiver is a shrinking population base. Japan may be illustrating to the world that capital equipment/robotics can augment a shrinking human labor supply and preserve a decent standard of...
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  • Guest - Will

    this story could have easily been called "nobody wants crummy old homes" If you google around, you'll find that many of the abandoned houses have to be reached on foot paths, (no car access) and as the article notes, they aren't that well built in the first place. The US is similarly filled with ...
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  • Guest - jm

    Working hours statistics from Japan must be taken with several handfuls of salt. "Sabisu zangyou", i.e., overtime not clocked under pressure from the employer, is extremely common, even in good times, and especially in bad.
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Joe Nocera rightly takes Jeff Bezos to task for making Amazon an undesirable place to work. (Sorry, I have more sympathy for the warehouse staff in overheated warehouses than the overachievers who are treated poorly at headquarters.) However he gets one part of the story wrong.

He tells readers:

"Practically from the moment Amazon went public in 1997, Wall Street has pleaded with Bezos to generate more profits. He has ignored those pleas, and has plowed potential profits back into the company. Bezos believes that if Amazon puts the needs of its customers first — and no company is more maniacally focused on customers — the stock will take care of itself. That’s exactly what has happened. That is the good side of Bezos’s indifference to the opinion of others."

While it is clear that the stock market has rewarded Amazon, just as it rewarded AOL.com in the 1990s bubble, it is not clear that Amazon had "potential profits" to plow back. Profits are independent of investment decisions, at least if a company is not engaged in accounting fraud. Amazon may have kept prices low to expand market share, thereby depriving itself of profits, but then it doesn't have money to plow back either. It is very hard to make sense of the assertion that Amazon somehow doesn't have profits because it is re-investing, although if it gets not very bright market actors to believe it, Amazon's share price can continue to rise.

It is also important to note the big handout that Amazon has relied upon from taxpayers. Amazon has not had to collect sales tax in most states for most of its existence, giving the company an enormous subsidy in its competition with brick and mortar competitors. The cumulative size of this subsidy almost certainly exceeds its cumulative profits in the years that it has been in existence. Any discussion of Bezos success should mention this huge subsidy from the government.

Recent comments

  • Guest - Steven

    I am wondering if Dean is confusing the Statement of Cash flows with the Income Statement. In the Statement of Cash Flows operations and investments are separate. However on the Income Statement investments are most certainly subtracted from profits. In the case of R&D they are expensed immediat...
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  • I've worked in 120 degrees for hours on end for minimum wage. Sorry, but this doesn't seem likely. Humans can stand 120 F for short periods of time, but are not likely to produce anything. What is the highest temperature a human being can survive?...
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  • Guest - Ellis

    Actually, a lot of big box stores are subsidized also. They charge sales tax, but then keep most of it, instead of handing it over to the government.
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In his two months as a candidate for the Republican presidential nomination, Donald Trump has said many things that are racist, sexist, or otherwise offensive, but that doesn't mean that everything he says is off the mark. The Wall Street Journal took Trump to task yesterday for dismissing the relatively low official unemployment rate and instead focusing on the large number of people who are not working. 

While the WSJ is right that the vast majority of people who are not working are people who chose not to work. These are older people who are retired, young people who are still in school, or people who are taking time out of the labor force to care for children or other family members.

Nonetheless, even if we control for changes in demographics there has been a sharp decline in the employment rate of prime-age workers (ages 25-54) from the pre-recession level. The employment rate of prime age workers is still down by almost three percentage points from its pre-recession level and almost four percentage points from its peak in 2000.

While many analysts try to explain this falloff with vigorous hand waving, it is almost certainly due primarily to the weakness of the labor market. It is implausible that millions of prime-age workers suddenly decided that they don't feel like working. Trump is right to call attention to the drop off in employment, even if he is wrong to be worried that our grandparents or teenage children aren't working. 

Recent comments

  • Guest - Kent Rughoff

    When oil prices are low, oil producers shut down the wells to reduce production. Should that also apply to workers? When wages are low, it isn't worth the time to get a job.
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  • Guest - Len

    I've hired people who had to train their contractor replacements before being laid off. They were all good people, with good skills, working at big companies with names you'd recognize. Then at 51, after 30 years in IT, I was laid off from a huge and profitable mega software corp. No problem with...
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  • It is no revelation to most people here that low wages stall the economy -- and employment. What might be a revelation is that low wages in the US are so incredibly low that they keep masses of AMERICAN BORN workers out of the labor market. They wont work for sub-LBJ minimum wages -- DOUBLE THE PE...
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In a blogpost Paul Krugman picked up on a discussion by Rex Nutting of the Carter presidency. Nutting points to many of the positive accomplishments of the Carter years, including the fact that, by many measures, the economy actually performed quite well.

Krugman picks up on this theme and uses a chart of median family income to show that the typical family was actually better off in 1981 when Carter left the White House than they had been in 1977 when he took office. Krugman argues that the problem for Carter's re-election prospects was that income was declining in the last years of his presidency, which is what people had in their minds when they went to vote.

While this point is undoubtedly accurate, there is another complication when we try to get a sense of people's perceptions when they went to vote in November of 1980. The measure of inflation that is used to derive real median income in Krugman's chart is the CPI-U-RS. This applies the methodology that we use today to construct what the CPI should have been in prior years. This gives a very different and much lower measure of inflation than the CPI that the Bureau of Labor Statistics was using at the time.

Here is how the two compare for 1978-1981.

                       CPI         CPI-U-RS

1978             9.0%               7.8%

1979            13.3%             10.7%

1980            12.5%             10.7%

The cumulative difference for these three years is 5.6 percentage points. (Yes, this is just adding and I should be compounding, but let's keep this simple.) This means that folks going to vote in 1980 would have been seeing in the data a 5.6 percent greater drop in real income by 1980 than what Krugman has in his chart. The question is whether this error in the data would have affected people's perceptions of their well-being or whether we should only care about what we might think of now as the "true" rate of inflation.

I would argue for the importance of the errors in the data. First, none of us really have a clear idea of the true rate of inflation. It's based on a basket of goods and services that none of us literally buy. There is a big weight for large purchases, like cars, that we may buy at five year intervals, or even longer. Also, the prices are quality adjusted. Is the typical person's assessment of the rate of the quality improvement in a cell phone or computer the same as the BLS's assessment? It's very likely that if she pays more for a car or computer than for her last purchase, she sees that as a price increase, even if BLS has determined that the quality adjusted price has fallen.

On the other side, back in the late 1970s many contracts were legally tied to the CPI. This meant that workers had reason to know the inflation rate shown by the CPI since it would determine their pay increase that year. This was often true of rents as well. As a result, if the BLS said the rate of inflation was 13.3 percent in 1979, it is likely that many people thought the inflation rate was 13.3 percent, even though our methodology now tells us that the rate of inflation was actually just 10.7 percent.

There is more to this story of mis-perceived inflation—could mis-measured inflation lead to actual inflation? I'd argue yes, but we'll leave that one for another day. For today, I'll just say that it was not only Paul Volcker's Fed that doomed Jimmy Carter's re-election prospects, but also the mistakes made by the folks at BLS.

Recent comments

  • Guest - Bob Monroe

    The Chapwood Index is more like reality than any of these.
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  • Guest - pete

    Seems to be a cart versus horse issue. I think you are trying to say that we need the BLS to tell us how fast our paycheck is shrinking in real terms? Seems bizarre. Consider local differences, for example. Folks in SF or NYC have a very good idea about what it takes to live there compared to sa...
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  • Guest - fresno dan

    One of the problems with the CPI is the use of "hedonics" and the unwillingness to even consider "Craponics" - the goods and services declining in quality or value. Seriously. Is there any attempt to acknowledge that things just aren't getting better and better in economics??? For example, what us...
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Mitch Daniels did a big pitch for making student loans more complex and more profitable for the financial industry in a Washington Post column today. The basic story is that he is pushing "income-share agreements" where students contract with lenders to pay them a fixed share of their income for a number of years after they graduate college in exchange for a student loan.

My bet is that good students will be able to figure out ways to get much of their income after the end date on the ISAs, but that is the lender's problem. The more obvious problem is that Daniels is making a pitch for special government assistance for his friends in the ISA business.

He wants Congress to pass a law that will make the ISA loans exempt from bankruptcy. This means that if a student has a serious illness that makes him or her unable to work or falls on really bad economic times, he can be harassed for the full term of his contract by ISA lenders. This can be 25 or 30 years after graduation (or possibly not graduating).

That may not sound like such a great way to help our young people deal with college costs, especially since there are much simpler alternatives, like the income-based loan repayment plans initiated by the Obama administration or other proposals to reduce the cost of college. Daniels rejects such plans by telling readers:

"It is fallacious to term such an approach “debt-free”; borrowed by an already bankrupt federal government, the money will be all debt, merely shifted to taxpayers, including these very same students as they enter their working years. Already facing $57,000 per person in federal debt, incurred not for their future but almost entirely for the current consumption of their elders, the last thing today’s young people need is another massive federal entitlement program."

Sorry folks, but anyone who thinks the federal government is "bankrupt" should be treated like a ranting nut, because this is utter nonsense. If Daniels had access to the business pages, he could see that the United States government can now borrow long-term for an interest rate of less than 2.1 percent. Private sector lenders do not lend money to "bankrupt" borrowers at less than 2.1 percent interest.

If Daniels could take off his tin hat, he might notice that the $57,000 in debt per person corresponds to hundreds of thousands of dollars in assets in the form on infrastructure, technology, natural resources, and the education of its population. In Daniel's calculation, our children would be better off if we stopped paying for their education altogether to get down the $57,000 debt that he thinks is burdening them.

If anyone wants a serious assessment of the debt burden on the federal government, at present interest payments, net of refunds from the Federal Reserve Board, are less than 0.7 percent of GDP. By contrast they were over 3.0 percent of GDP in the early 1990s.

 

 

 

Recent comments

  • Guest - Bob Hertz

    The Daniels proposal has some flaws, but it is a million miles better than doing nothing -- I define 'nothing' as harassing borrowers for payments they cannot afford to make, harassing their parents, garnisheeing Social Security checks, and virtually forbidding the saving grace of bankruptcy. The IS...
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  • True but there is a problem with state run schools funded through fed gov. guaranteed loans. Higher spending at your state schools means more jobs in your state and so if the Fed Gov. is helping students to pay why economize. Gov. funding has not fallen spending per student has gone up See here. We ...
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  • Guest - urban legend

    Joe Hufford -- What is your relevant point in your comment about interest rates? If the public will buy government bonds paying 2.1%, that means "the market" does not consider there to be any risk that the principal will never be paid back. That was Dean's point. How rates are established seems comp...
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That's what millions of people are asking after reading a NYT article contrasting the "bombastic" Donald Trump to Jeb Bush who is described as "the wonky son of a president." Bush has repeatedly said that he can generate 4.0 percent GDP growth during a Bush presidency.

The baseline projection for the years 2017 though 2025 from the Congressional Budget Office is 2.1 percent. Raising this to 3.0 percent would be a remarkable accomplishment. There is no remotely plausible story that would raise growth to 4.0 percent. It would be sort of like predicting a baseball team going undefeated through 162 game season. It would be difficult to take seriously a team manager who confidently made such predictions. The same should apply to a presidential candidate boasting of 4.0 percent GDP growth.

Recent comments

  • Guest - Redwood Rhiadra

    Yeah, Jeb's 4% growth line is stupid. But he's explicitly being compared to Donald Effing Trump, who thinks Mexico will pay us to build a 2000-mile-long Berlin Wall. Compared to Trump, Jeb is a towering intellect.
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  • Guest - Dave

    I find Jeb a bit odd. He just strikes me as a person that does not understand the details of anything including his own existence. He's a 10000-foot view kind of guy, like, stand back 10000 feet from him when he talks because the lack of substance might suck you into his black hole....
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  • To a journalist anyone who knows talks about GDP growing between 0 and 10% per year is wonky. Journalists are just slightly more knowledgeable about economics than the average USAer. The USA citizen thinks the average company makes a 36% profit margin...
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The Post has an interesting piece on a St. Louis Federal Reserve Bank study which shows that African American and Hispanics with college degrees have far less wealth than their white counterparts. (Stay tuned for CEPR study showing this story with wages.) The study also shows a large decline in wealth for African Americans and Hispanics with college degrees over the last two decades.

It attributes much of this decline to subprime mortgages pushed by lenders during the bubble years:

"But African American and Hispanics were often steered into high-cost home loans that many could not afford once the housing market crashed. Those who managed to stave off a foreclosure still watched the value of their properties took a nosedive, especially if they lived in minority neighborhoods."

While a subprime loan made it more difficult for homeowners to keep their homes in the crash, the loss of wealth was due to plunging house prices. Even if an African American or Hispanic family bought a house with a traditional fixed rate 30-year mortgage they still would have seen a huge hit to their wealth when the housing bubble collapsed.

This point is important because the warning signs were everywhere for economists and policy analysts to see. However, they chose to ignore them and encouraged minorities to buy homes at bubble-inflated prices where they were virtually guaranteed to see large losses. Unfortunately, most of the people who were involved in setting housing policy during the bubble years are still in the same business today. Most do not appear to have learned much from the experience.

Recent comments

  • Guest - Steven Danis

    I would think that local events I observed at close hand bear out the authors' basic conclusions. I live just outside of Allentown, Pa., a city which was very much caught up in the boom/bust real estate cycle of the 2000's. The boom began about 2002 and had burned itself out by around late 2006/ea...
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  • Guest - James

    Your point is valid but for RE, it's all location, location, and location. The housing price for west and east coastal areas esp. the major cities have rebounded nicely. Housing wealth has come back somewhat.
    1
  • Guest - Jay

    This isn't a surprise. there is a wage disparity between races and there is less generational tranfers of wealth with black families. The failure to address the low labor participation rate and create government jobs for work experience to move into the higher paying private sector has hurt their we...
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